Wednesday, January 29, 2014

Gold Looks Good In 2014 Despite Fed Tapering, Canadian Oil Price Differential Under $20 Into 2016 pipelines

Key things to note this first month of 2014:  From December 31, 2013 to January 29, 2014 spot gold gained US$85 to close at just under $1270 but keep in mind that if your currency isn't the US dollar then gold got even more expensive thanks to i) ongoing currency crises in emerging markets ii) Canadian dollar drops to 4-year low versus the greenback; country decides not to raise interest rates. iii) fiscal liquidity problem developing in China.  But don't get too excited just yet - At $1255 the April futures gold price remains lower than spot.  Osisko is suing Goldcorp - alleges misuse of confidential information.  I guess that puts an end to Goldcorp's $2.6 billion hostile bid for Osisko.

Canadian WCS oil price:  Canadian oil price differential expected to remain under $20 for the foreseeable future, well into 2016.  A couple reasons for this

  • Enbridge is expanding the capacity of a key pipeline in Wisconsin:  from 400,000 bpd to 1.2 million bpd.  That will have a positive effect on the oil and gas industry in the US NW (three-fifths of oil output in ND is shipped by rail).  Enbridge has also proposed the Sandpiper Pipeline which will add 225,000 bpd to Minnesotia plus another 375,000 bpd to Wisconsin.
  • BP and Marathon refineries in the US are being upgraded to handle more heavy crude from Alberta.
  •  Glut of supply in Wisconsin may be relieved when portions of the Keystone pipeline come online (southern leg of Keystone running through Cushing, Oklahoma became operational January 22).
  • Trans Mountain pipeline from Edmonton to Burnaby tripled capacity from 300th to 890th barrels per day.

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Despite several factors working in its favor, over the last few weeks the price of gold hasn't really moved in either direction, as investors were anticipating a tapering to the Fed's $80 billion monthly bond buying program (put downward pressure on commodity prices).  When it finally happened on January 29 ($10b/mo) gold went up as is to be expected (no more tapering in the short term).  I have some concerns about Fed tapering.. The Fed claims that economic activity picked up in recent months -> this should cause money to flow out of commodities and into equities... however that doesn't appear to be happening (soft jobs growth in December).  If you're concerned about interest rates rising in response to Fed tapering don't be:  The Fed has explicitly stated that it will maintain a policy of record low interest rates (gold does well when interest rates go down).

Counteracting this and lifting the price of gold is

  • Currency crisis in emerging markets specifically Turkey, South Africa, Argentina - safe haven investing favors gold, US security notes
  • Financial liquidity problem developing in China; banks aren't lending and that's making it worse
  • Less US monetary stimulus is wreaking havoc on currencies in South Africa and Turkey where account deficit problems are forcing interest rate hikes.